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Clarity is Key to Solving the California Housing Crisis

By Jack Gallagher, Managing Principal, Dahlin Group Architecture

Of all the challenges we face in this life, many of us would likely include the following as one of the most frustrating to contend with: to be misunderstood. As selfish as this might first seem, it is nonetheless an unselfish concern when misunderstanding is detrimental to victims beyond ourselves, to the extent that they are deprived of some truthful knowledge that might otherwise better their lives. Obviously, the more we care for those around us, the more we should seek to eliminate the misunderstandings that deprive them of certain goods.

(Continued from The Weekly)

Affordable housing is a good that has been going away in California. Who is to blame for this crisis? According to a recent poll of the general public, the #1 major reason for the housing crisis is due to “developers who are trying to maximize profits…”. Less than a third of respondents cited governmental regulations as a major cause of the problem, and neighborhood groups and environmental groups who block or oppose new developments were at the very bottom of the list of perceived causes for the crisis.

Putting aside any critique of the leading questions fabricated within the poll, the results are quite disturbing for their reflection of the public’s mindset, but they are not so shocking to those of us who have already experienced these popular misconceptions first-hand in our day-to-day business of trying to help develop more affordable housing in California. The results simply validate the depth of ignorance we have long suspected.

To be clear, there is no question that for-profit housing developers seek to make a reasonable profit by their endeavors, just the same as butchers, bakers and candlestick-makers. And few among us would argue that the building industry is not without the occasional perverted profiteer, for there is no segment of society that is completely insulated from disordered motives. But to blame developers of new housing as the cause of the crisis is to deny the facts, to ignore the true causes and associated solutions, and therefore increase the crisis.

Those who dig deeper into the causes for the high cost of housing tell a different story. An independent study conducted by the Fermanian Business & Economic Institute at Point Loma Nazarene University concluded that about 40% of the cost of housing in San Diego County can be attributed to governmental regulations. The study also states, “Time cost is typically the largest cost associated with residential real estate development and it can have a profound impact on the types and locations of projects undertaken. Factors such as the existence of a master plan, environmental opposition, and local regulatory approval procedures can all greatly influence the overall cost of capital for a given project…”.

The study confirms the significant costs of risk and uncertainty associated with the development of housing due to the opposition’s influence on the discretionary approval process. One can only imagine how much the costs will increase in San Diego County—due to increased risk and extended time delays—if the upcoming “ballot-box planning” initiative is passed, for it will require that new General Plan amendments be put to a public vote rather than being left to the discretion of the County Planning Commission.

Furthermore, risk and uncertainty greatly influence the rates of return on investment demanded by private lenders due to such risk. The profits sought by banks and other lenders can have a considerable impact on the cost of housing depending on how much capital the developer needs to borrow.

In short, when you “follow the money”, you see that the picture is much more complex than the over-simplified correlation between the developer’s profits and the home-buyer’s purchase price. The final profits (or losses) that evolve from the process of developing a new home are linked to the land seller’s price for the land, the costs of borrowing capital from lenders, attorney’s fees, the engineer’s and architect’s fees for the level of design and time-consuming attention required to meet the myriad of governmental/environmental regulations, impact fees, school fees, inclusionary housing costs, and so on. Not to mention what may be the most challenging part of the process, the uncertainty in trying to pin down the ever-increasing costs of the labor and materials required to build each home so as to determine whether the project will pencil—whether it will be worth the effort to commence any development process in the first place. For every developer who succeeds in making some sort of profit at the end of the day, there is another who has failed due to the high degree of uncertainty and risk associated with this complex and costly process.

It is remarkably ironic that the no-growth NIMBYs, environmental extremists, and other opponents to new housing developments like to perpetuate the myth of developer profits as being the main cause for this crisis when in fact the opponents themselves play right into it, for their actions have a substantial impact on the supply side of the supply-demand equation that factors into the price-point of housing. There should always be a place for reasonable public scrutiny of major projects, but not for unreasonable groups that seek to place impediments in the process simply because they have some sort of special interest, or an axe to grind against growth. The more the various special-interest groups seek to impose artificial controls, whether of wage rates, rental rates, regulations or what have you, the more housing costs will rise because the developer will no doubt pass those costs along to the consumer.

As bad as it is to be misunderstood out of simple ignorance, it is much worse to be the target of intentional misrepresentation by organized activists representing labor, environmental, socialist, and no-growth groups who seek to sway public opinion in order to achieve their questionable objectives. But of course, the real victims—those who suffer the most—are those in the workforce who cannot afford housing, including our sons and daughters. As long as the misrepresentations and misunderstandings continue, so too will the vicious cycle that leads to escalating housing costs. Clarity is key to understanding and solving this crisis.